The credit crisis is pressuring car dealers on a number of fronts, as they sell into an economic headwind while also facing concerns from customers related to escalating fuel prices. Many lenders, meanwhile, have cut back on their loan programs or tightened conditions for customers to qualify for loans, exacerbating what is already a perilous time for car dealers. It’s a far cry from just a few years ago, when lenders were much more lenient when it came to doling out cash for just about any type of large purchase.

The changes made by lenders have redrawn the map for dealer-lender relationships, forcing dealers to examine their current funding rosters and to send them looking for new sources. Borrowers with less-than-perfect credit have become particularly difficult to finance in recent months, thanks to fallout from the subprime mortgage market meltdown.

Take the auto dealer who, in searching for a lender, was recently told that the lender would only originate loans if the balance was under $8,000. “From the dealer’s perspective, that wasn’t something he could even build a business on,” says Payam Zamani, CEO and chairman of San Ramon, Calif.-based online financing marketplace Reply.com, and founder of Autoweb.com. Zamani expects more dealers to steer clear of subprime deals over the coming months — a trend that could present an opportunity for those dealers with solid, existing relationships with lenders that specialize in the subprime market.

Layoff Uncertainty

At Bill Gray Volvo in Pittsburgh, finance manager Lisa Schaum is concerned about a number of subprime lenders that have laid off thousands of dealer reps — a sign, she says, that fewer deals are being closed. And while her firm does much of its business with Volvo Finance, she says dealers in her area are reporting 25 or more application turndowns per month right now.

“I have people who are making $200,000 to $300,000 a year, and I can’t get them approved,” says Schaum. “Even income doesn’t seem to be able to balance out those credit challenges.” For now, she plans to stick with her current group of lenders, while keeping a close eye on those firms’ willingness and ability to finance deals. “No one has a crystal ball,” says Schaum, “but going forward, I think we’re all going to have to re-evaluate our lenders.”

That means going back to the drawing board and figuring out which lenders will be most likely to approve applications. Jeff Bennett, a former owner of Chevrolet and Toyota dealerships, and currently an assistant professor at Northwood University in Midland, Mich., says dealers need to go beyond the traditional “What is the lender going to do for me?” question, and instead consider what the lender should do for individual applicants.

So whereas approvals appeared to rain down from the heavens in the past, especially when using long-time lender-partners, these days lenders are looking more closely at the individual applicants, rather than the dealers. Mike Sheridan, president and founder of Los Angeles-based auto loan exchange Global Debt Network, says this shift warrants dealers to take a more diverse approach to lender evaluation, and to consider numerous options that can accommodate a wider range of buyers.

When assessing those lenders, Sheridan says dealers should look at how each has reacted in the past during both good and bad times. “Put lenders to the fire a bit,” he says. “Find out how good they are at supporting their customers and/or helping them find other relationships within their own organizations, or at outside entities.”

Lender due Diligence

Dealers must also talk to one another to figure out which lenders are most apt to approve applicants, Sheridan says. “Lenders complete due diligence on the individual dealers,” he says, “and I think dealers need to start doing the same with their lenders.” key points to discuss include the lender’s turndown record, application requirements, record of approving subprime loans, and record for deactivating dealers.

“Deactivation has become a very common practice during the past year, particularly for dealers that aren’t sending enough business to the lender,” says Sheridan. Deactivated dealers should immediately call the financing company to find out the reasons behind the decision, and then work to rectify the situation. If, for example, a lender pulls the plug because it feels a dealer isn’t meeting expected deal levels, then it may be time for the latter to reassess just how important that lender is for the company, and whether the relationship is worth saving.

The Stress Factor

Sheridan says dealers should also look to open lines of communication with lenders and make them two-way streets, despite the fact that they haven’t histori- cally worked that way. “Go back and ask them what’s going on in their business, whether they’re tightening up lending standards and how those changes will affect internal underwriting practices,” says Sheridan. “With financial institutions under a tremendous amount of stress right now, the smart dealers are picking up the phone to find out what’s going on.”

Going forward, expect to see tighter lending practices forcing dealers to continue re-evaluating the financial institutions that their customers do business with. By taking proactive measures when working with new and prospective lenders — and when structuring the deals themselves — Sheridan says dealers can be better prepared to handle any changes that come their way. “This is going to force dealers to react quickly,” he says. “Hopefully the close relationships they have with their lenders will see them through, otherwise it could result in further funding problems.”